~ Investment Strategy

Macro Stream

The FOMC surprised the markets by maintaining its rate of asset purchases ($45bn of Treasuries and $40bn of MBS per month). Mr. Bernanke, at his press conference, seemed to do away with the previous guidance that asset purchases would likely finish by mid-2014 with unemployment at 7%, saying “there is not any magic number that we are shooting for”. The growth projections for 2013 and 2014 were revised down from June, but the forecasts for unemployment showed a faster rate of improvement. Mr. Bernanke inadvertently tightened monetary policy quite sharply (as shown in the large jump in real rates over the past few months) with his talk about tapering. The FOMC is now trying to undo some of the damage by maintaining QE.

The House looks set to approve a spending bill without funding for the healthcare law after Mr. Boehner failed to convince his caucus to do otherwise. The Senate looks set to pass a temporary spending bill that would not de-fund the healthcare law. The House could pass the Senate bill, if Mr. Boehner was prepared to contravene the Hastert Rule — but it is not in his interest to do so. Republicans are placing measures against Obamacare in both the spending and debt-ceiling bills, but I expect them to make a stand on the spending bill and allow the debt ceiling to be raised.

Writing in the FT, Charles Dumas has some clear thinking on Chinese capital-account liberalisation. He says the following. Chinese real interest rates have risen and China has become less internationally competitive. These effects are damaging the economy. The government could do another stimulus package, but that would damage the country’s competitiveness still further. A better solution would be to allow Chinese residents to invest abroad, which would be a step towards capital-account liberalisation and bring down CNY. But note that the Chinese government has a problem, in that a capital outflow would reduce bank deposits and expose some of the weaknesses of the banking system; large recapitalisations might be required. Chinese capital-account liberalisation, when it occurs, could be a huge phenomenon for global markets, as Chinese capital flows into global risk assets.

Housing starts 0.89m d.e. Aug. This series appears to have reached a plateau.

Building permits 0.92m d.e. this series also appears to have reached a plateau. Mr. Bernanke’s tapering talk seems to have brought the improvement in the housing data to an end. With mortgage refinancing also down sharply since the spring, one has to wonder whether residential investment growth could stall. Perhaps we could see a normal cycle, in which monetary tightening slows residential investment and then consumer spending more generally, with eventual knock-on effects on investment.